Your rich uncle leaves you a bequest: a continuous, constant payment stream of $

Question

Your rich uncle leaves you a bequest: a continuous, constant payment stream of $2000 per year for the next 10 years. The terms of the bequest require that it be paid into a certain account that will not be available to you until the 10 years are up. The account earns an annual interest rate of 3.25% compounded continuously. You discover that you can get an annual rate of 4.1% compounded continuously for a long-term certificate of deposit (CD) at the same bank. Suppose that you are able to persuade the executor of the estate to buy a CD whose value after 10 years will be the same as the amount that would have been available to you under the terms of the bequest, and to pay you the difference between the present value of the bequest and the cost of the CD. How much do you get now? How much do you get in 10 years?

Explanation / Answer

www.public.asu.edu/~atmxh/fin361/ch3.pdf

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